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Mid-Cap ETFs Getting Less Risky Than Large-Cap Peers

Smaller stocks, including mid caps, are usually more volatile than large-cap names. In November, that trend shifted in favor of mid caps as large-cap stocks became more volatile.

The SPDR Mid-Cap 400 (MDY) is among the exchange traded funds tracking the widely followed S&P MidCap 400 Index.

Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth.

“While the S&P MidCap 400 risk of 19.1% and S&P SmallCap 600 risk of 21.8% were also elevated ending Nov. 30, 2018, it is interesting to note the large-cap risk was higher than the mid-cap risk. The last November when this happened occurred in 2007,” said S&P Dow Jones Indices in a note out Monday.

Middle capitalization stocks, sometimes referred to as the market’s sweet spot, could help investors achieve improved risk-adjusted returns. Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow and provide more stable stock prices. Additionally, they are not so big that their size would slow down growth.

Historical Data

Mid caps have historically outperformed large caps, but the former does so with a bit more risk.

“Going back to 1991, when the S&P MidCap 400 was launched, it has delivered on average 3.2% extra of annualized return but at a cost of higher 1.4% annualized risk, based on daily data from Jan. 2, 1991 – Nov. 30, 2018,” said S&P Dow Jones.

The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.

“This November, the S&P 400 gained 2.9% versus the 1.8% from the S&P 500 and the 1.4% from the S&P SmallCap 600. In mid-caps, 9 of 11 sectors were positive, while 8 of 11 large-cap sectors gained and 6 of 11 small-cap sectors gained,” according to S&P Dow Jones.

Last month, energy was the worst-performing mid-cap sector, but that sector is the third-smallest sector weight in MDY at just 4.74%.